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What is gap insurance and what does it cover?

If your car is totaled or stolen, gap insurance coverage will pay the difference between the actual cash value (ACV) of the vehicle and the current outstanding balance on your loan or lease. Sometimes it will also pay your regular insurance deductible.

Car owners often assume that if their car is totaled, it will be replaced at the amount they paid, or at least the amount they owe. This is not so. That is why many car insurance companies offer gap insurance (or loan/lease payoff insurance) as an optional coverage. You must also have comprehensive and collision insurance to buy gap coverage, but if you lease or finance your car, those are typically required.

If your insurer totals your vehicle by a covered peril, such as an accident, theft, fire, flood, tornado, vandalism, or hurricane, the insurer will pay you the actual cash value for your car, if you have comprehensive and collision insurance. This amount is often considerably less than the amount you still owe on your loan or the amount due for a lease payoff.

When the amount of your ACV payout is less than what you owe on your lease or loan, the loss from this financial shortfall is the "gap" you can be left owing. This is where gap coverage comes into play.

What isn't covered by gap auto insurance?

Gap insurance usually won’t pay for:

  • Overdue lease/loan payments
  • Costs for extended warranties, credit life insurance or other insurance purchased with the loan or lease
  • Carry-over balances from previous loans or leases
  • Financial penalties imposed under a lease for excessive use
  • Security deposits not refunded by the lessor
  • Amounts deducted by the primary insurer for wear and tear, prior damage, towing and storage
  • Equipment added to the car by the buyer, meaning that only factory-installed equipment is covered
  • Mechanical issues, such as engine or transmission failures, or any other car problems that are not losses covered by your car insurance policy

Does it cover theft?

Yes, gap insurance covers your car if it’s stolen and not recovered. It works with your comprehensive insurance to cover theft. Comprehensive will pay out up to the actual cash value of your car, minus your deductible if your car is stolen. This coverage would then pay the difference between that amount and what you owe on your loan.

How does gap insurance work?

Let’s look at an example of how gap coverage refunds work to protect you when you owe money on your car and it’s totaled or stolen.

This is how a "gap" occurs (using fictitious numbers):

  • You buy a car that costs $25,000 and drive it off the lot.
  • After paying the down payment, you owe $24,000 in car payments over five years (0% interest loan = $400 car payments).
  • You purchase comprehensive and collision insurance with a $500 deductible to protect you against damages and loss.
  • You have an accident while you're still upside down on your loan or lease (meaning you owe more on a car than it's worth) and your vehicle is totaled.
  • The insurance company determines that the actual cash value of the car is only $22,000, but at the time of the loss you still owe $23,500.
  • Gap insurance should pay the difference plus your deductible, totaling $2,000. (Note: not all gap policies pay the deductible).

Here are the line items:

  • Loan payoff at the time of accident: $23,500
  • Vehicle's actual value at the time of accident: $22,000
  • Your deductible: $500
  • Physical damage insurance pays: $21,500 ($22,000 minus $500 deductible)
  • Gap insurance pays the difference between what is owed and what the physical damage insurance company pays (plus your deductible): $2,000

What is loan or lease coverage and how it is different from gap coverage?

While the terms gap insurance and loan/lease coverage are often used interchangeably, they aren’t quite the same coverage normally. Gap coverage will pay the difference between the amount you still owe on a vehicle and actual cash value (ACV) paid out by your car insurance company. Lease/loan coverage typically has limitations on how much it will payout, such as 25% over the determined ACV of your vehicle. Both are minus your deductible.

For an example, say have a $500 collision deductible and total your vehicle that is valued at $18,500 but still owe $25,000 on it. The difference between what you owe and what the value of is $6,500. After you pay your $500 deductible there is a $6,000 difference. With a gap insurance policy, it would pay out this full amount. With lease/loan coverage that pays only up to 25% over the value of the vehicle it would only pay $4,625 (18,500 x 25% = $4,625). So, with the lease/loan option you would still owe the remaining $1,375.

To make sure lease/loan coverage would work for you, run the numbers. For instance, if in the example above the vehicle was worth $20,000 then 25% of its value would be $5,000 and that is the same as the gap ($25,000 due - $20,000 paid by insurer and your deductible = $5,000) so it would have covered the whole amount.

Another example,  Let’s say you have loan/lease coverage that pays 25% more than actual cash value of your car, and you buy a car for $40,000. Then the car depreciates to $25,000 over time. The most you’d get reimbursed would be $31,250 minus the deductible after it’s declared a total loss.

Do I need gap insurance?

If you financed or leased your car, you likely need gap insurance, says Penny Gusner, senior consumer analyst for CarInsurance.com. Here’s why you should get it:

Many car owners don’t take into account the depreciation that takes place with a new car. Within minutes of driving off the lot, a new car can be worth 10% less than what you just paid. In our example above, if you owned the car for three days, and the car was totaled, you could owe 10% to 20% of the $24,000 ($2,400 to $4,800 out of your pocket) even though you purchased full coverage.

And depreciation continues over the life of your car, especially in the first five years you own it. According to CarFax reporting on current depreciation rates, the value of a new vehicle can drop by more than 20% after the first 12 months of ownership. Then, for the next four years, you can expect your car to lose roughly 10% of its value annually. This means that a new car can be worth as little as 40% of its original purchase price after five years.That means the payout you would get for the value of the car is likely to be much less than what you owe for at least the first several years.

If I bought my car outright, do I need gap coverage?

There's no reason to buy this coverage if you bought a car with cash and own it without a loan. It is for when you owe more than the value of your vehicle. If you have the car paid off and it’s no longer financed, you don’t owe anymore more than the car is worth, and so there would be no payout from gap coverage.

 If I paid a high down payment, do I need it?

If you put down a decent down payment, your vehicle doesn’t depreciate at a steady pace and you're paying down the balance of the loan each month, you typically wouldn’t need gap insurance coverage. 

Gap car insurance is only needed if you have negative equity in your car (owe more than the value of the vehicle) since this coverage only pays for the balance of the loan left after the ACV is paid out when your car has been found to be a total loss by an insurer. 

Is gap insurance necessary & required by law?

While it's good to have if you owe more on a vehicle than its value, gap coverage isn’t required by any state as part of your car insurance policy.

Gap insurance coverage is optional coverage; however, it’s not uncommon for lease contracts to have gap insurance included in them. Sometimes it's referred to as auto loan/lease coverage or loan/lease payoff coverage.

If a lender of leased cars requires gap insurance, they must include it within the lease's cost itself. This means that the monthly price quoted by the dealer must include gap coverage when they mandate you carry it.

There are some financial institutions that may want you to have gap coverage as part of your auto insurance policy on the car you're purchasing. If this is the case, your loan or lease papers should note this.

If you have declined gap insurance, a dealer shouldn’t be able to add it on to your loan amount or charge you for it in another way. Even though it may be helpful if you owe more on the vehicle then its ACV and were to be in an accident, you should have the right to turn down this coverage and thus not be charged for it.

For example, the California Car Buyer’s Bill of Rights requires disclosure of the price of items commonly packed into loans, such as theft etching on windows and other car parts, gap insurance or extended service contracts.

In general, dealers anywhere should provide car buyers with an itemized price list for all these items, such as warranties and insurance, if the items are being financed.

If you have a charge for gap insurance from your lender and don’t have this coverage, discuss the matter first with the financing company that added into your payment. Unless you signed paperwork stating that you would add gap coverage to the car at the time of purchase as part of your finance or purchase agreement you should be able to decline it and get a refund.

If you don’t want gap coverage and have problems getting it removed, try contacting your state agency's consumer division. The office of the insurance regulator should be able to help you.

Is gap insurance worth it?

The answer to this question depends on your situation. It's a good idea to get gap insurance if you owe a lot more than what the car's worth.

So, for instance, if you bought an $80,000 car and only put down $5,000, you may want to get gap insurance so you're not stuck having to make up the difference if an insurer totals your car.

If the outstanding loan or lease balance is only slightly more than the vehicle's, you may want to chance it. In that case, it's a good idea to put some money aside in case you need it if an insurer totals your car.

In addition to depreciation, you may find gap insurance worth the money for these reasons:

  • You owe more on your loan than what your car is worth
  • You made a low down payment on your car, under 20%
  • You don’t have enough savings to pay the gap between your loan and your car’s value
  • You drive more than 15,000 miles a year, as this accelerates your car’s depreciation
  • The model car you have depreciates at a faster rate than the typical average

Does gap insurance always pay out?

It pays out as long as the total loss claim isn’t denied and you have car insurance coverage in effect. However, if you have missed car payments, that amount will be deducted, says Gusner. For instance, if you are late on a car payment of $400, that amount would be deducted from your gap insurance pay out.

When gap insurance doesn’t pay?

There are instances when gap coverage won’t pay out. For example, if the claim for the totaled or stolen car is denied for some reason, or if your car insurance coverage lapsed, your gap insurance won’t come into play. And, because it's limited to claims that declare your car a total loss, it wouldn’t cover the following, which is covered under other types of car insurance:

  • Injuries: Gap insurance does not cover medical bills. Your bodily injury liability would pay for medical expenses for those you injure in an accident you cause. Your own injuries would be covered by the other driver’s liability insurance or your personal injury protection or MedPay insurance.
  • Property damage you cause: Damage you do to another car or someone else’s property would not be covered by gap insurance -- your property damage liability would.
  • Damage to your car that isn’t your fault that doesn’t result in a total loss: Even if your car sustains serious damage, gap insurance will only cover it if it is considered a total loss and you can no longer drive it. The other driver’s property damage liability would pay for damage to your car. Or, collision insurance would cover it, regardless of fault. In both cases, gap insurance would not cover the claim because the car wouldn’t be declared totaled.

Will gap insurance pay your deductible?

The answer depends upon your gap insurance policy. Some policies pay the deductible and some don't. When it pays the primary insurance deductible amount, the deductible amount isn't actually reimbursed back to you. Rather, the primary insurance deductible is taken from the payout of your totaled vehicle and covered as part of your unpaid loan balance, which gap insurance pays.

How to get gap insurance for cars?

You can buy gap insurance for cars from the following:

  • The bank or financial institution that loaned you the money to buy the car
  • The dealership where you bought the car
  • Your car insurance company
  • From a company that specializes in stand-alone gap insurance policies

Can I get it without primary insurance?

You need to have a standard auto insurance policy to get this coverage. For your gap insurance to be in effect, you need to carry physical damage coverages of collision and comprehensive on your vehicle in addition to your state’s required minimum liability insurance requirements. This "full coverage" of liability and physical damage coverages is also normally required by the bank or lending institution where you got your car loan.

Even if you get stand-alone gap policy, you still need your state's minimum auto insurance coverage. That's the insurance coverage you need to drive legally.

Can I purchase gap insurance on a used vehicle?

Yes, typically you can. State laws and insurance companies’ guidelines vary, but there are gap policies that are available for used cars that are financed. It's beneficial when the value of a vehicle, whether new or used, depreciates while you still owe money on the loan or lease.

Is gap insurance acceptable as proof of insurance?

A gap policy isn’t accepted by any Department of Motor Vehicles as proof of insurance. It’s not the right type of insurance needed to show financial responsibility when you're going to register, or renew registration, on your vehicle.

Showing proof of gap coverage to law enforcement wouldn’t help if they ask you for proof of insurance. It is optional coverage that only helps you out in a total loss situation, it doesn’t provide the state-mandated liability coverage that police want to verify that you have on your vehicle.

Can I get it on a loan that is not for a car?

You cannot get gap coverage for lines of credit that may be used for purposes other than a vehicle. It doesn’t work with mortgage loans, credit lines, balloon payments or other types of non-vehicle specific loans.

If you have used money from your Home Equity Line of Credit (HELOC) to purchase your vehicle, gap insurance would not cover this type of loan since the HELOC is not specifically to be used for a vehicle loan.

Gap coverage is normally only able to be purchased and used when you have received your money through a conventional auto loan or lease to obtain your vehicle.

Can I buy gap insurance if my loan is from an individual?

Gap policy providers won’t offer coverage if your loan is through a private individual.

When dealing with a bank or finance company, the gap insurance carrier knows the terms, sees the paperwork, etc. With a private party loan, it is hard for the gap carrier to be assured that the loan is only for the vehicle, payments were made properly, etc. – all things that an insurer requires.

Can you buy gap insurance anytime?

Gap providers' terms and guidelines differ; in general gap insurance is available on new, used and refinanced cars, trucks and SUV’s leased, purchased or refinanced within the past 12 months. So if you know within the year after financing, leasing or refinancing your vehicle that you owe more than its ACV gap coverage could be beneficial for you.

FAQ about Gap Insurance

Am I due a refund if I pay the car off? How do I get a refund?

If you financed your vehicle and the gap insurance is part of your vehicle's financed monthly payment, it is doubtful that you would receive any refund for your gap insurance. That is because when the coverage gets paid for monthly -- as part of your financed monthly payment -- the coverage is used that same month.

If you paid for your gap insurance policy in full, you will need to contact the company that sold you the policy to see if there is any unused premium that should be refunded back to you when you trade in or pay off your car.

How can I cancel my gap insurance?

You can cancel gap coverage if you determine that you no longer need it. 

Gap policies, terms and fees vary. To find out about how to cancel your existing gap policy, you’ll need to read through the contract. If you still have questions, contact the insurer directly. 

If you recently purchased the policy, depending upon your gap insurance company, you can receive a full refund if you cancel within a certain time period (typically 30 days). A cancellation fee may apply. 

After that initial period, if you cancel the policy, you normally will receive a prorated refund. Also, any refund would come only if you paid in full upfront for the gap insurance policy. If your gap insurance coverage were set up so that you paid a monthly amount for it (for instance, included in with your monthly car loan), you should still be able to cancel the gap policy. However, you shouldn’t expect a refund since the portion you paid each month would have been used in that month already.

If your gap coverage is part of your auto policy, then to remove, typically, you just need to contact your insurance company to make the change of removing it and no longer be billed for it each month or policy term.

If you’re still upside-down on your car’s loan, gap insurance is likely still needed.  If you now owe less than the car's ACV, you could cancel your gap coverage since it would not pay out if your car were totaled out by an insurance company after an accident.  

If you no longer want your current gap insurance policy because you believe you paid too much for it, shop around to see if a cheaper policy is possible. If it is, then see about canceling out your current one before buying the new one.

If you bought your gap policy through a dealership or finance company, it is quite possible that you could find a policy with a credit union or auto insurance company for much less.  We recommend shopping around for gap insurance, just as you should for the car insurance policy for a new car. 

What is stand alone gap insurance?

Stand alone gap insurance is a separate policy, so it’s independent from your existing car insurance policy. Typically, gap insurance is added to your standard coverage. However, some companies sell stand-alone gap policies, though there are very few. If you buy stand-alone policy, be sure to check the details, as it may be more expensive than buying it from your existing company, and may have limitations on what it pays out. For example, stand-alone policies may cap the amount they pay out, and may be sold for just a two-year or three-year term.

Does a late car payment void out a gap policy?

No. Being late with your car payment won’t void out your gap policy. 

However, your gap insurance won’t pay out for the late payments if you total your vehicle and you're behind on payments. Gap coverage usually pays out the difference between your wrecked car’s ACV and the remaining balance due to your lien holder on your car loan. But there are exceptions and conditions to gap policies for certain items, such as late car payments.

If you have overdue payments or were granted a payment holiday so that some payments were moved to the end of your loan, this amount wouldn’t be covered by your gap policy.

Will gap insurance pay if the claim is denied?

No, it won't cover your car if it's declared a total loss but your claim is denied for coverage or if you did not have primary insurance coverage on the vehicle at the time of the accident.

Is gap insurance transferable?

Gap coverage can't be transferred to a different vehicle or loan. If you're trading in, selling, or buying a new vehicle, you'll need to get a new policy to cover the newly financed vehicle.

Is gap insurance transferable after refinancing?

Gap applies to a specific loan or lease and typically is non-transferable. If you already had a gap policy in place, that coverage would normally be voided out when you refinance a vehicle -- you would need to get a new gap policy on it.

Does gap insurance come with a deductible?

No, it doesn't normally have a deductible. 

What is a gap waiver?

A gap waiver is different in that it is an agreement under which the creditor agrees to waive the lessee or debtor’s obligation for the difference between the "gap amount" and the actual cash value of the property. On a leased car, the cost of gap insurance or waiver is generally rolled into the lease payments.

When did gap insurance start?

This coverage type began in the early 1980s to help those insured who purchased a car and found themselves owning more than the car was worth if it was in a total loss situation.

The higher price of motor vehicles, longer-term auto loans and the increasing popularity of leasing in the 1980s is what created gap protection as a type of insurance for car owners.

How long does gap coverage last?

It will continue for the duration of your gap policy. You don't need this coverage once you've paid off your car loan, or even once you owe less than the actual cash value of your car. At that time, you should notify your insurer that you want to cancel the coverage. Otherwise, it will remain in force until the end of the gap policy terms.